Changes in Executive Compensation: Needless Costs or a Key to Shareholders' Wealth

Abstract: This paper aims to examine stock market reaction to announced changes in executive compensation packages. The hand-picked sample of 136 official news announcements released over 2002-2012 by companies included in the NASDAQ OMX Nordic list is employed. For comparison reasons a larger sample of 309 events is used, which additionally includes announcements released on the dates when companies had published other news. The standard event study methodology is applied in order to examine if abnormal returns caused by the announcements could be observed. Also, the total value of compensation programs documented in the announcements is estimated and compared to the aggregate euro return observable after the announcements. The event study results reveal that there is no statistically significant market reaction to changes in executive compensation packages when full samples are employed. Subsample analysis provides with some weak evidence for abnormal return of 1.1% over a two-day event window if compensation changes are targeted at top executives, i.e. CEOs, CFOs and/or Board of Executives. Besides, some weak statistical evidence has been found for slightly negative market response of -0.4% to company proposals to introduce new pay programs or to continue existing ones.